Should we prepare for a capital winter? A look at the ecosystem of small and medium-sized enterprises between economic crisis and inflation

14/09/2022
APPROFONDIMENTI

With the markets in deep red and recession clouds on the horizon becoming increasingly threatening, many believe that for start-ups and SMEs this autumn will be a difficult season for growth and access to sources of finance.

In Italy, fortunately, there are courageous entrepreneurs who are not letting themselves be intimidated by a historical moment that is unfavourable to say the least. Between the energy crisis, the war in Ukraine, inflation, the Covid that comes and goes and a domestic policy that is always quite unstable, the picture is depressing on the surface. The reality, in fact, may be different - in the first half of 2022 start-ups increased by 12% compared to last year. This could mean that the desire to invest is increasing.

According to the Venture Capital Monitor report, there were 157 new investments in the first six months of this year compared to 137 in 2021. The amount invested by domestic and foreign operators in Italian start-ups (EUR 957 million) grew by 123% compared to EUR 429 million in the first half of 2021.

There was a slight slowdown in the amount invested in foreign companies founded by Italian entrepreneurs, which fell from €379 million to €176 million, with the number of transactions in line with the previous year. Adding up these two components, however, the overall total stands at EUR 1.1 billion (in the first half of 2021 it was EUR 808 million).

Should we expect a capital winter?

Against a global backdrop of the end of 'quantitative easing' by central banks, rising inflation and consequent rise in interest rates, we have certainly entered a new historical period of monetary tightening, with less liquidity for investments, a higher price of money and renewed interest in certain asset classes (such as government bonds) that for years have been little or not at all profitable.

This 'perfect storm' also seems to be affecting the valuation of start-ups and SMEs, but is this really the case or is it unfounded scaremongering?

On the one hand, the vertical fall of 'tech' stocks on Wall Street in recent months is certainly significantly reducing the valuations of scale-ups and unicorns that until a year ago were seen as 'disruptive' realities. In many cases, billions of investments rained down on these companies, which after a few years were recouped with interest thanks to very favourable IPOs or exits based on valuations well above the market average.

Italy is not America

Our ecosystem has always suffered from 'dwarfism' when it comes to funding rounds at every stage. An indication of this are the various start-ups with Italian founders that have achieved 'Unicorn' status in recent years but have taken their headquarters outside the borders, mainly for reasons related to the availability of investments on competitive terms even more than for the greater scalability of international markets.

According to the data published by the Ministry of Economic Development, as of 1 July 2022, there were 14,621 innovative Italian start-ups registered in the business registry, 3.7 per cent of all newly established corporations, a figure that is up from the previous quarter with 259 new units (+1.8 per cent).

In addition, in Q2 2022, the Guarantee Fund for SMEs (FGPMI) handled 666 transactions towards innovative startups, up by 7% compared to the previous quarter, and the total amount of funding potentially mobilised stands at around €193m, up by 44% compared to the January-March 2022 period. Moreover, in Q2, the average funding amounted to EUR 289,000, up 34% compared to the previous quarter.

Conclusions

In all countries with an ecosystem one level below that of the 'big players' USA, UK and Israel, the trend is one of growth, and all players must strive to ensure that Italy too follows this trajectory.

Paradoxically, we have an extraordinary opportunity to level the playing field with the other countries. This can be achieved by increasing the average size of the smaller rounds at a time of 'pause' in investments and IPOs of the more mature realities. What is needed, however, is coordinated work involving legislative bodies, market making organisations and private stakeholders. Finally, we as industry players must also believe in the possibility of new Italian entrepreneurs to 'give it a go', and to give value to the country's immense private wealth that is struggling to raise capital for growth.



  • PMI
  • Startup
  • finanza
  • scaleup
  • Crescita
  • approfondimenti